International_Business_Studies

Originally published in Harvard Business Manager in February, 2010 in Germany less painful and for corruption to disappear from everyday life- there will be only one opportunity left for them that they will come to Indian as tourists to spend money and not earn it as businessmen. Today India needs every conceivable support for the realization of its growth and to satisfy the hunger of the consumer population, as it is only here that one can do good business and earn good money. Some German companies are well established in India and have already earned substantial amount of profit. But for many, today the question is not whether they should go to India, but where and how. Modalities of JV with small and medium size India in parts n Companies India is a land of "impossibilities that often make the impossible possible" Arun Gairola* Although India is known for its poor infrastructure, crippling bureaucracy and widespread corruption, many German companies are attracted to it. The German media has publicized the attractiveness of the setting up of operations in India; a country which has developed as an economic power and in these times of the bad economic environment in the western business world. Even small and medium sized companies in Germany are forced into establishing ventures in India. India is home to over 1 billion people and with its over 300 million middle-class consumers it represents a very important market. But opportunities are always accompanied by risks. This must be anticipated and avoided in order to succeed in India in the long run. Companies that are still waiting for the Indian infrastructure to match German standards, for the bureaucracy to be Despite the global economic crisis, the Indian economy will grow by 6%, which the Western industrial nations cannot even dream of. To assist companies through this venturous journey, there is a number of governmental and parastatal (quasi-autonomous non-governmental) organizations. In addition, there are a number of so-called Indian experts and consultants who specialize in the management of businesses in India. Despite the availability of counseling, many companies, after mustering up the courage, make the fundamental error of jumping into business in incredible India without proper preparations. These errors in circumstances can lead to such a shock that their dream of the making it big in In1 dia can turn into a nightmare from which they might never recover. But this need not be the case if one follows a few simple rules. So the question is: Why do such things happen and how can they be avoided' At the “Zeppelin Stüble” in Hotel Graf Zeppelin in Stuttgart, I met the owner of a midsized company engaged in automotive business for lunch. His company’s clients are renowned companies like BMW, Daimler, Ford, GM, Renault and other wellknown companies. The company has an annual turnover of more than 240 million Euros and employs approximately 1,400 employees. The company has established itself in the global market through innovation, development and manufacturing expertise. As of now it is located only in Europe and USA. Two years ago the company decided to follow its customers to India, since the clients required Local Content, reasonable prices and shorter delivery times for their production in India. Hans M. is a member of the Board and responsible for production abroad. Three years ago he had established and implemented a joint venture with an Indian company. Now he also serves on the Executive Board of the Indian JV. The Indian family owned company operates in the same sector, represents a turnover of approximately € 16 million and has a little more than 1,200 employees. My meeting initially had the objective to learn from his experience how small and medium size company manage their relationship with their Indian partner. In the course of our conversation he revealed to me candidly that there were severe problems in the joint ventures and he was helpless in resolving them. Mr. M. had selected the Indian partner from a list of companies published by various Indian and German sources available on the internet. For the JV negotiations, he was assisted by an Indian firm and a tax consulting firm. Both companies had been recommended to him by the Indian partner. The JV Contract: The prime objective for the German company was to gain access to the Indian market with a local partner. Through cash payment the company acquired a 29% controlling stock. The contract included among others an agreement that Mr. M’s company may not have any other partners in India. The German partner, according to the contract, should supply the necessary 2 knowledge and the technology which is required for the manufacturing of its products. The Indian partner should complete the production in India, promote the business through marketing and service the customer in India with Sales & Service. Two employees from the German company should relocate to India and be responsible for the manufacturing quality and product development. Mr. M. was registered as a Board Director and attended the quarterly meetings. He explains the following: In the board meeting decisions were made but without the active participation of the German partner in the decision-making process. The Indian JV partners were outsourcing the business from the existing factories and building a new factory for the JV. The new location of the factory in a remote area, which was not comprehensible. No one from the German company was involved in the evaluation process. The Indian partner had taken additional external loans in the name of the joint venture - without informing the German partner. The company's financial situation did not seem to correspond to the data presented. For the construction of the new factory the Indian partner wanted more and - more “know-how” details for the manufacturing and product development. The contract provided that the German partner sends at least one development head to India. Employees who have been working for the Indian partner for a considerable time should be assigned to him. When the development manager requested for certain information, the Indian employees would ask their superiors or even the company owner about what they should say. The Development Manager was not invited to any business meeting which took place spontaneously and on an ad hoc basis. Regular meetings did not exist. The development manager, on the recommendation of the Indian partner, was advised to live with his wife and two small children in the north part of Mumbai. It took him two hours to drive to his office. According to the partner’s recommendation, the rent for his house was budgeted at 1000 €. This estimate was not adequate, since Mumbai has the highest rents in the world. The employee was provided a car, but no local support or domestic help for his family. In order to provide his family with a car the German employee requested an Indian employee (subordinate) to give him lift to work. All business related 3 telephone calls during the trip were therefore no longer confidential. Moreover, it is not a standard practice in India, for a head of development, especially a foreigner not to have his own company car with driver. What went wrong with the JV'  Minority Participation: No family business, particularly in India, likes foreign participation. If an Indian family owned business enters into a venture, then it is only a minority participation, mainly for the following reasons: • Know-how & Technology: The pressure from foreign competition is growing dramatically, and this is difficult to deal with for the Indian family with its own resources. Most small family businesses have built their business by copying products, and therefore have neither the knowledge of the product nor understanding about the development of the product. Even today many of these businesses do not employ any engineers, fearing that they in turn might steal the product idea. • Capital: Many family businesses lack the necessary capital that they would need to make their business competitive, with regard to quality, against financially strong international companies. And capacity constraints are also restricting many companies from expanding their facilities. • Brand Name: Today in India a foreign manufacturer is considered more trustworthy than a local counterpart. To appear competent to prospective customers and to improve their image, Indian companies, therefore search for a well-established foreign partner eventually with a good brand name. Once they acquire the right to use the brand name they start promoting and selling their own products under that name. • International markets: It is well known that Indian products and companies do not yet have a good reputation with regards to quality and reliability in order attract European customers. There is an image problem too. Traditionally India is perceived as poor, chaotic and under-developed country with illiterate people, rampant corruption, stinking garbage and dilapidated infrastructure as picturesquely depicted in the Golden Globe and Oscar winning film Slumdog Millionaire. By the way the film was not popular at all in India and did not fare well at the box office as Indians felt it was an insult to evolving modern India and to its recent achievements. Therefore, Indian companies search for German partners because these companies traditionally have a good reputation worldwide. Joint venture with or even acquisition of a German company helps Indian partner with piggy-back marketing of 4 their products and services in Europe and elsewhere in the world. As soon as these targets are achieved, the Indian partners try to regain the independence. Although there are statutory measures to safeguard minority participation, there are a number of ingenious methods to get rid of the foreign partner. The Indian company can for example perpetually request for money for investment in industrial expansion or an employee is encouraged to subversively initiate actions against the partner. In some cases they are not afraid to use even violence. Or the Indian partners launch the same business under a different name in parallel to the JV and develop it in part on the expense of the JV.  Competition clause: The German pany which is very small even by Indian standards.  Decision-making process: Family businesses make decisions within the family, usually over dinner. These families have elder members who call the shots - even though a dynamic young member of the family who has studied abroad (mostly in the U.S.) officially serves as the Managing Director (CEO). The foreign partner has no access to these conversations and will be hardly involved in major corporate decisions, and as a fait accompli rule he will be included only in decisions where he usually can or must agree with the decision.  Monitoring the expenses: This is an area where the Indian partner has the greatest scope for the organization. He knows the ways in which he must deal with the government authorities and is aware of the local control mechanisms through which he does secondary business with the suppliers and manipulates the staff salaries (The SATYAM case represents the extent to which this can be done). He can also create bogus transactions with family members and much more. For an international partner, even though he might have spent many years in India, it is almost impossible to understand these processes and keep track of 5 company has agreed to conduct their business only with the Indian partner. It was overlooked that India is a large country with a population which is 2.5 times larger than that of Europe with its 27 countries. It is the same case as coming into such a contract with a Swedish company, which includes the clause that the partner may not operate with another partner or by itself anywhere else in Europe. This might make sense for large partnerships but in the above case it deals with a com- them and then react in a controlled manner. The processes are devised and refined. Indian entrepreneurs know what relevant information they can disclose and which they should not disclose to the tax department, their shareholders and the foreign partners. They also know how to manipulate these facts. The German partner can only get an insight and understanding into the real financial situation of the company earliest by the second business term. By this time his financially commitment will be so large that an exit is still hardly conceivable. Since in many cases black money is also a part of the game, the German saying „Mit gefangen, mit gehangen“ (Caught together, hung together) finds quick context in the real world.  Information flow: It is often the case that former employees of the Indian partner will be moved into the JV. They are obviously loyal to the Indian partner and will do only what they say or recommend - even what kind of information they should impart to the foreign partner. In family businesses, the business communication flow is basically "Top-down" and this is given high priority, if external parties are involved.  Employee posting: Employees are often sent as "our man in Havana" to India, incognito, to monitor and control the business practices of the Indian partner and where appropriate to inform the parent company, especially in critical situations. The Indian partner knows about the secret role of the foreign employee and will therefore be very careful about what, when and how he receives information.  Support of local experts: The Indian partner naturally recommends a local expert; one who he knows well, with whom he does business and commands good relations. This way he ensures that the recommended local expert will work in favor of the interests of the Indian partner. This also applies to locally hired management and staff, because they know they live in India and will continue to live there, so it is natural for them to listen more to the Indian partner than to the external foreign employee who has come temporarily to India. But here I would like to emphasize that the points listed above are valid points for a wrong partner selection. There are numerous joint ventures with Indian partners which (still) can be identified as successful. Over the past 20 years nearly 3,000 JVs between German and Indian companies have taken 6 place, where two thirds of the JVs have a German majority ownership. The JVs usually have a lifespan of six to ten years; at the end of the JV-term one partner usually buy the shares of the other. Critical aspects of JVs with Indian the smell, because in India everything smells different. Observe what is happening around you and try to understand why it happens that way only. And finally, you should accept that in India the clock runs at a different speed. Adjust yourself and your business strategies to this aspect. Visit the country several times and interact with friends, acquaintances and experts who know India and allow them to describe, explain and advise you about conditions and processes. Don’t be Since 2002 CLAAS has been operating with CLAAS India Limited and manufacturing combine harvesters in a factory in Faridabad, near the Indian capital of Delhi. The enterprise has, in the meantime, become a 100%th subsidiary of the CLAAS group. To start with it was a joint venture between Claas and the Indian company Escorts. Nowadays CLAAS India Limited annually produces approx. 350 combine harvesters. The priority tasks since the purchase of CLAAS India Limited are: • misled about the efficiency and purchasing power of Indians because of the chaos, the omnipresent poverty and most of all by the garbage lying on the sides of the street. It is not "child's play" to manufacture a Nano or to send an indigenous observation rocket with the highest level of precision (unheard of till date) to the moon’s orbit. When required the "chaotic" Indians can really make it happen. • • • Maintaining the well-known CLAAS quality without making an compromises Expansion of local suppliers (Local content)) Continued identification of ratio and improvement potential in collaboration with the suppliers Identification and development of a companies can be avoided if attention is paid to some important points: Even with the conservative assumption that only 10% of Indians can afford European products, there are more than 100 million potential customers and consumers. Most of them reside in the 35 large urban cities in India and this 7 • Get to know India. Visit India, but if possible try to leave your prejudices behind. Allow the country and its impressions influence you. It starts with group is growing at an estimated increase of 5% every year. yourself first if you actually require a partner. All the above problems can be avoided if you set up a subsidiary company or buy an Indian company. In the case of the earlier mentioned Swabian company it would not have been necessary for them to take on a partner to access the Indian market because they already had an impressive list of clients who would have proved to be excellent references and to a great extent these clients also manufacture their products in India and require local content. Moreover, in India German companies are known for their high quality and reliability. A manufacturing and collaboration with development • Look for an Indian partner with the help of experts and organizations that are neutral in word and who will stand by your side in their actions. These experts should pri- marily and exclusively represent your interests. Any cost cutting on these services is uncalled for, because the failure of a JV will later cost you dear. The German-Indian Chamber of Commerce, the Indian Government or the German Embassy provide experienced consultants, etc. partly free of cost; it would be advantageous to consider these option. majority ownership would have been appropriate. For this German company the strategy of duplication of the domestic business in India under its own purview would have been even more attractive. Many German firms have gained the required experience with JVs and are now moving towards 100% ownership. Others are considering about how they can exit with minimal damage. In the present case it was also not necessary to choose a partner from the 8 • “If you wish to know something about India you must empty your mind of all preconceived notions. Why be imprisoned by the limited vision of the prejudiced' Don’t try to compare. India is different and, exasperating as it may seem, would like to remain so…………… • Indira Gandhi • Select a partner after considerable research and clear criteria but ask same industry with similar or the same product range. It would have been sufficient to collaborate with a partner who has the technological expertise in manufacturing such products. Then the risk of conflicts of interest would have been eliminated and cross dependence achieved, since the product development expertise would have remained with the parent company. • Employ neutral experts and consultants as advisers. If the potential Indian partner recommends them, then check their reputation and relationship with the partner. Ask for references and credentials. There are a number of government and private organizations which can recommend recognized and reliable experts and consultants whose specialty is assisting foreign companies to enter the Indian market. • Have a clause in the contract – in case you choose a minority stake – that your consent is required for certain business activities and you will participate in the decisionmaking process (“Reserved Matters") at the board and management level. While stipulating Exit Conditions such as pre-emptive rights tag • pay attention to the accuracy and unambiguous clarity in the contract. This will prevent any hankypanky in the sale and transfer of shares to family members and other Indian companies. Appoint employees of Indian origin for management positions abroad, preferably those who have studied and worked in German speaking countries. The candidate pool is very small, so it is recommended to seek suitable candidates in India or by the Indian partners themselves, and to place them for several months (about 6 to 12) at the German company. There they will get an insight into the workings of the company. It also provides an opportunity to develop a personal relationship with these employees during their stay and to assist them in learning German. The ability to communicate in German will promote deepening of relationship and loyalty. These employees will then ensure that the flow of information functions as required and the JV will operate as per the terms of the German partner. They will also ensure quality, timely delivery and to some extent provide in general an attitude towards the customers ac9 along rights, drag along rights, etc. cording to the western philosophy and as per western standards. The Indian partner will easily accept an Indian in his inner circle as compared to a stranger. They will serve as the perfect bridge between you and the Indian JV partner. velop your relationship with the Indian partner. Indians are known for their flexibility in terms of time and promises. The elasticity in both cases is far beyond the tolerance limits of the Germans. Regulatory processes and the work practices of Indians have a totally different sense of time than we're used to. • Develop mutual dependencies with the Indian partners, in which for example, you can help him build his business in Germany and in other countries in Europe. Or even include him in your company at the same level of hierarchy, as you hold in his business. But you • Do not worry about the alleged corruption which is based on the Western definition. You have to call a spade a spade (speak the truth), it may be unpleasant and politically incorrect. It is a normal practice to gift officials - mainly inspectors money and other material things in order to run your business without interference and to expedite certain administrative decisions. In well- should also ensure that the Indian partner does not get complete knowledge so that tomorrow he is not in a position to be your competitor in your business domain. You could also integrate the business processes in the parent company and in India into one another, so that the Indian partner cannot do anything without your participation. • informed circles it is called speed money. This is something very obvious, because all over the world it costs extra money for any express delivery! Check the business performance through a robust measurement • Be patient. The success of JVs in India is based on how well you de- system. The Indian partner will resist it and strive with all sorts of arguments to ensure that this system 10 is not implemented and will try to suggest that their own systems – if any - is sufficient enough. Exer- so emphasize and make it clear how much you need the Indian partner and how much he needs you. cise control even in trivial matters. Define and carve out your own territories and demonstrate that you • Aquarius Engineers Pvt. Ltd, a high tech construction machinery organization in Pune has won a legal fight against its German Joint-Venture-Partner Putzmeister AG. The point at issue was the construction of an own subsidiary under the name of Dynajet Machinery India Pvt. Ltd., in 2005, in Goa, India. Putzmeister had got into a JV in 1997 with a 24% share. This share was increased to 65% in 2005. Nevertheless, Putzmeister had decided to establish its own subsidiary in India. are in a position to question everything. Encourage your partner to be open and to show loyalty. Decide sometimes consciously against your partner’ proposition demonstrating your position to the Indian management. Appear critical and show that you are prepared to defend your ground and not step back from controversial disputes. But al- Try to conclude your contracts in such a way that you are not solely dependent on an Indian partner or make sure that for at least parts of the core business processes, for example R & D and Supply Chain, there is independence and scope for expanding the collaboration. Such agreements can leave doors open for future decisions and actions. Limit therefore the nature and content of the collaboration. The balances are tipped towards you, because the Indian partner needs you more urgently than you need him. The partner of a joint venture is largely free under Indian law to determine the content of their joint venture agreement. Detailed regulations should be met concerning the joint venture company, its business and the relationship between partners. • Appoint employees with international experience and equip them with the appropriate privileges, for example as a Joint Managing Di11 rector in order to ensure that he is mandatorily involved in the decision-making process and gains access to business information. Make sure that in case of a longterm assignment the employee's family receives full support, is accommodated according to European standards and is locally assisted by a relocation expert. The assigned person is your James Bond, and to make sure his mission is successful you have to support him with right tools, create locally a facilitating environment for him and provide local experts like MI6 and its Mr. Q do it for James Bond. India is the market for the future and one of the most interesting technology development centre of the world and this is just not limited to the IT sector. Nano and Chandrayan, the rocket to the moon are two well known current examples out of several which serve as evidence for the technological competence of Indians. India is catching up in many areas of techThe successful machine factory of the Swabian enterpriser Berthold Leibinger has 50 establishments in 26 countries and it has gained substantial experience with JVs and establishment of 100 % subsidiary businesses abroad. Recently it has opened a Customer Solution Centre in Pune which is being managed by an Englishman and an Indian in tandem. The Indian manager had studied in the FH (College) in Reutlingen and was earlier employed in Ditzingen. After a one-year-old indoctrination in the primary establishment of the company he was sent to India to build and manage the centre. nology e.g. in Pharmaceuticals and Biotechnology, Aeronautics, Renewable Energy which still are under the supremacy of advanced countries. But for how • Do not always count on the legality of the contractual arrangements, since a legal dispute is a long and tedious affair in India, lasting upto 20 years and more. In general, you should promote good cooperation; to begin with avoid disputes and exit where appropriate, with reasonable losses. A failed con- long will it sustain' A study undertaken by the Deutsche Bank, SAP and the University of Kaiserslautern predicts that the subcontinent will grow 12 clusion is better than a nightmare without an end. JVs are not meant to be for eternity. faster than any other country by 2020. Despite the global crisis, the IMF says, that India will grow by over 5% in 2009 and by 6.5% in 2010. The Indian government has assumed a growth rate of over 7% in 2009. For German business this offers great opportunities. Hans-Peter M. from the Swabian Company did not look very pleased at the end of the meeting. He was probably wondering how he could come out unscathed from the joint venture, because he asked me if there were ways to recover the capital invested so far without incurring great losses. He knew that in his JV some things had gone the wrong way. Based on the experience with numerous foreign JVs partners, we can conclude that: • a clear formulation of the objectives and the clear definition of the business contents and its dissociation from other business partners, • a time based delimitation of team work and fair Exit Conditions an agreement of measures for resolving conflicts • • • the careful recruitment of Indian management and suitable staff, good personal relationship with the Indian partner and its employees, regular contact and exchange of information between the two partners at all levels, • coordinated performance measure- ment and control systems and the correct selection and appointment of the foreign expatriate and appropriate local support to his family according to western-standard are seen as important prerequisites for the success of the collaboration. India is home to over 1 billion inhabitants and its middleclass population of over 300 million consumers represents a very important market. But opportunities run hand-in-hand with risks. This must be anticipated and avoided in order to succeed in India in the long run. Large companies such as Siemens, Daimler and VW have specialized in-house departments and experts to prepare and implement the operations abroad. They also have the necessary resources to employ well-known consulting firms in case their own resources are insufficient. In the case of small and medium-sized companies the operations are not just different in Germany but also in India. They generally have neither the sufficient expertise nor large amounts of money to carry out risky experiments and gather experience with the "Go To-India" project. Therefore while establishing joint ventures between small and medium-sized businesses major issues can be avoided for both the parties if money is not saved in the wrong place; namely in the appointment of experts. And these must not necessarily be from large and expensive 13 consulting firms. Otherwise it would be Indian companies is like Indian marriage, you carefully select your partner and once married develop affection and love for each other and not the other way! ultimately penny wise, pound foolish. Most JVs in India were concluded at the time when foreign companies were not allowed to enter the Indian market with own 100% subsidiaries. Since 2000 this law has been changed for all industries, with a few exceptions. Only if there are serious strategic reasons for it, should a JV be formed in India but most Germany companies who have experienced a JV in India recommend against it. Despite the diverse challenges and risks Indo-German joint ventures offer opportunities to both sides. The main points are by far the understanding of Indian business practices and the exit arrangements in the possible case of closing a JV. On the other hand there are numerous excellent candidates for a genuine partnership and successful strategic joint ven- GKN Sinter Metals has recently completed its acquisition of Mahindra and Mahindra Limited’s 51% share in Mahindra Sintered Products Limited (MSPL). The acquisition gives GKN a 100% shareholding in the company, which will now be known as GKN Sinter Metals Limited (India). MSPL was originally established as a joint venture between GKN and Mahindra 30 years ago and is currently the largest powder metallurgy producer in India. It manufactures sintered bearings and structural parts for a range of applications such as automotive, home appliance and general industrial applications. ture in India. However, the success of a joint venture in India solely depends on sustainable preparation, extremely careful selection of the right partner, the drafting of the contract and subsequent implementation of the project in India. And not to forget, have always up to date information in and around your joint venture, be constantly involved in decision making process and afford your partner the necessary support. Ultimately your competent support and personal involvement will foster trust and fruitful cooperation. JV with • Dr. Arun Gairola is a Professor at the University of Applied Sciences, Schweinfurt in Germany. He teaches Management Techniques, International Management and Negotiation, Personality Development, and is an expert on Change Management and Indo-German Culture and Collaboration. He has more than 20 years of industry experience and has worked as top manager for Digital Equipment, ABB, ALSTOM and ATKearney. He consults specifically small and medium sized companies exploring or 14 doing business in the Indian market and can be contacted at arun.gairola@vcorp.de 15